'Swipe fee' cap affects banks

Wednesday

Jan 9, 2013 at 2:00 AM

You've seen someone do it, or perhaps even done it yourself: paid for a cup of coffee or pack of gum with a debit card, after finding only a couple of pennies in your pants pocket and not a single bill in your wallet.

Jessica DiNapoli

You've seen someone do it, or perhaps even done it yourself: paid for a cup of coffee or pack of gum with a debit card, after finding only a couple of pennies in your pants pocket and not a single bill in your wallet.

The swipe through the card reader isn't free, even though it seems like it. Merchants have to pay "swipe fees" on debit and credit card transactions to the banks that issue the cards and card companies like Visa or MasterCard.

A 2011 law put a cap on "swipe fees" for debit cards from large banks, and now might be affecting the revenue of community banks and credit unions, as well as shops selling small-ticket items like coffee and sandwiches.

The cap is about 22 cents, though that limit does not apply to small banks and credit unions, who can still charge about 1 percent of the purchase price, said J. Craig Shearman, a spokesman for the National Retail Federation. Credit card fees are much higher: between 2 percent and 3 percent, he said.

Kenneth Clayton, general counsel for the American Bankers Association, said market forces will eventually end up leveling the playing field, forcing small banks to lower their prices to be on par with larger ones. There is evidence this is already happening at some banks and credit unions, he said.

Mid-Hudson Valley Federal Credit Union hasn't noticed a decline in income from debit cards, but is planning ahead just in case. In December, the credit union launched a debit rewards program to make up for any future revenue losses resulting from the cap, said CEO Wayne Winkler.

The program offers members cash back and other bonuses depending on how often they use their debit cards.

Even though the credit union might eventually end up getting less fee money per swipe, the hope is that more swipes will make up the difference, Winkler said.

Cash coming from debit card transactions is significant for the credit union: It makes up 20 percent of all of the nonprofit's operating income that does not come from interest-generating products like loans.

Large banks that have more than $10 billion in assets have already felt the effects of the cap. KeyBank, which has the largest share of the Orange County banking market, also launched a debit rewards program to counter revenue losses.

The bank reported a $15 million drop in electronic banking fees in the third quarter.

Lawmakers had hoped that the savings merchants got from the cap would be passed onto consumers, said Anisha Sekar, the vice president of credit and debit products for NerdWallet, a financial resource website.

Winkler questioned whether or not that ever actually happened.

But Shearman said that the change has held down costs for consumers and actually saved about $6 billion per year. But, because the change made some of the fees a flat rate, as opposed to a percentage, stores that sell small-ticket items have seen costs goes up, he said.

Spiros Panteloukas, who owns Downtown Bagels in the Town of Newburgh, is always looking to see who can give him a better deal on payment processing.

But Panteloukas said he hasn't seen a noticeable increase in his costs over the past year. About 25 percent of his customers use a credit or debit card to pay.

jdinapoli@th-record.com

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